Electronic trading system including an auto-arbitrage feature or name switching feature

ABSTRACT

An electronic trading system includes a plurality of trader terminals for receiving credit parameter data, arbitrage parameter data, and trading data from a trading entity, and a computer connected to the plurality of trader terminals via a communications network that receives and stores the credit parameter data and the trading data. The system also includes a detector circuit or program for automatically detecting an available arbitrage opportunity including a plurality of trades based on the credit parameter data, the arbitrage parameter data, and the trading data. A similar electronic trading system includes an automatic name switch feature wherein the plurality of trader terminals receive name switch parameter data, credit parameter data, and trading data from the trading entity. A circuit or program automatically detects and executes available name switch transactions based on the credit parameter data, the name switch parameter data, and the trading data.

CROSS-REFERENCE TO RELATED CASES

This application is a continuation of U.S. application Ser. No.11/266,404, filed Nov. 4, 2005 (now U.S. Pat. No. 7,225,150), which is acontinuation of U.S. application Ser. No. 10/325,982 filed Dec. 23, 2002(now U.S. Pat. No. 7,080,033), which is a continuation of U.S. patentSer. No. 08/571,106 filed Dec. 12, 1995 (now U.S. Pat. No. 6,519,574).These applications are hereby incorporated by reference in theirentirety.

FIELD OF THE INVENTION

The present invention relates to an electronic trading system whichautomatically identifies arbitrage opportunities created bycredit-related discrepancies within a market and optionallyautomatically executes the appropriate trades, thereby enabling atrading entity to extract low-risk trading profit from the market.

The present invention further relates to an electronic trading systemwhich automatically and instantaneously enables less credit-worthytrading entities in a market to trade using the credit lines of morecredit-worthy trading entities in the market, thereby creatingadditional market liquidity.

BACKGROUND

In electronic trading system for markets in which credit risks andsettlement risks are born by trading parties, the trading parties inputcredit lines into the trading system which are used to limit a tradingentity's exposure created by transactions with other trading entities onthe system. For example, by entering a low or zero credit line for aparticular trading counterparty, a trading entity prevents potentialtrades between itself and the potential counterparty. Thus, by adjustinga counterparty's credit line, a trading entity may limit its gross ornet exposure (outstanding risk) based on transactions with individualcounterparties and its total exposure to all counterparties.

In a matching system which enables trading entities to enter creditlimits, such as those described in U.S. Pat. No. 5,136,501 and U.S. Pat.No. 5,375,055, the credit parameters input by the trading entities mayresult in situations in which a first trading entity, trading entity S1,enters an offer which matches a bid entered by a second trading entity,trading entity S2, but the system will not execute the trade becauseeither trading entity S1 has not extended sufficient credit to tradingentity S2, trading entity S2 has not extended sufficient credit totrading entity S1, or both. Otherwise stated, there is insufficientbilateral credit availability between trading entity S1 and tradingentity S2. Notably, the trading entities may be individual banks andtrading institutions and/or groups of banks and trading institutions.

Similarly, trading entity S2 may enter a bid with a higher price than anoffer entered by trading entity S1. Again, S1 and S2 cannot trade withone another because there is insufficient bilateral credit availabilitybetween the two. In this instance, an “arbitrage” opportunity exists inthat a third party, trading entity S3, which has sufficient bilateralcredit with both trading entity S1 and trading entity S2, may buy fromS1 at a low price and sell to S2 at a higher price, thereby obtaining animmediate, low-risk profit due to the credit discrepancies in themarket.

The known electronic trading systems do not provide any means forautomatically identifying an arbitrage opportunity created by creditdiscrepancies in the market and optionally automatically executing theappropriate transactions, thereby enabling trading entity S3 toautomatically, efficiently and effectively capitalize on the arbitrageopportunity and increasing the liquidity of the market without theaddition of new bids and offers. While the system described in U.S. Pat.No. 5,375,055 displays the best available offer and bid prices to marketmakers, thereby indicating that an arbitrage opportunity exists whenthere is a discrepancy between the two prices displayed, the '055 systemdoes not provide any means for automatically identifying and/orcapitalizing on the arbitrage opportunity. Furthermore, the knowntrading systems do not provide any means of ensuring that all tradesneeded to successfully complete the arbitrage transaction will occurprior to executing any of the trades such that trading entity S3 doesnot incur the risk of only one side of the arbitrage transaction beingexecuted.

A related drawback of known electronic trading systems which accommodatemarkets in which the trading entities bear a credit and/or settlementrisk is that these systems do not provide a means by which a lesscredit-worthy trading entity, trading entity S4, may trade with othertrading entities using the credit line of a more credit-worthy tradingentity. For example, if trading entity S4 enters a bid which iscompatible with trading entity S2's offer, but trading entity S2 has notextended sufficient credit to trading entity S4, no transaction couldoccur in the known trading systems. However, if trading entity S4 wereable to use another trading entity's (e.g., S1 or S3) credit line tocomplete the transaction (assuming that trading entity S1 or S3 hassufficient credit with trading entity S2 and S4) through an agreementbetween trading entity S4 and trading entity S1 or S3, the liquidity ofthe market would again be increased. This “name switch” procedure may beinstantaneous (no discretion option is provided) or may be implementedto allow discretion of the part of the user in the context of anelectronic trading system.

The practice of name switching in which one party trades under thecredit lines of another party may currently be accomplished through theuse of a broker. However, there are presently no electronic tradingsystems which can automatically, instantaneously, and effectivelyperform the name switch procedure.

SUMMARY OF THE PRESENT INVENTION

In view of the above discussion, it is an object of the presentinvention to provide an electronic trading system which automaticallyidentifies arbitrage opportunities arising from price anomalies thatarise due to credit discrepancies within a market.

It is a further object of the present invention to provide an electronictrading system which automatically and efficiently executes the tradesnecessary to complete an arbitrage transaction without risk to thetrading entity, or automatically provides a trading entity with theoption to initiate the arbitrage trade.

It is another object of the present invention to provide an electronictrading system which is capable of performing an automatic,instantaneous name switch operation whereby a less credit-worthy tradingentity uses the credit lines of a more credit-worthy trading entity toexecute a desired transaction which would not be otherwise available tothe less credit-worthy trading entity due to lack of bilateral creditavailability.

The auto-arbitrage and name switch features have different purposes andaddress different needs within a market. The auto-arbitrage featureaddresses the need for a means of enabling a trading entity toautomatically and effectively avail itself of arbitrage opportunitieswithout incurring significant risk. The name switch feature is afunction of the commercial relationships between trading entities,whereby one entity utilizes uses the credit lines of another entity toobtain trades and compensates the other trading entity for the use ofits credit lines. However, both features are implemented through similarfunctions provided within an electronic trading system.

An electronic trading system having an auto-arbitrage feature accordingto the present invention includes a plurality of trader terminals forreceiving credit parameter data, arbitrage parameter data, and tradingdata from a trading entity and displaying trade information to thetrading entity. The trading data includes bid and/or offer informationinput by the trading entity. The system further includes a computerconnected to the plurality of trader terminals via a communicationsnetwork which receives and stores the credit parameter data and thetrading data from the plurality of trader terminals. The system alsoincludes a detector circuit or program for automatically detecting anavailable arbitrage transaction including a plurality of trades based onthe credit parameter data, the arbitrage parameter data, and the tradingdata; and a circuit or program for automatically executing the availablearbitrage transaction by executing all (or none) of the plurality oftrades.

An electronic trading system having a name switch feature according tothe present invention includes a plurality of trader terminals forreceiving credit parameter data, name switch parameter data, and tradingdata from a trading entity and displaying trade information to thetrading entity. The trading data includes bid and/or offer informationinput by the trading entity. The system also includes a computerconnected to the plurality of trader terminals via a communicationsnetwork, wherein the computer receives and stores the credit parameterdata, the name switch parameter data, and the trading data from theplurality of trader terminals. A circuit or program automaticallydetects available name switch transactions based on the credit parameterdata, the name switch parameter data, and the trading data, andautomatically executes available name switch transactions.

The electronic trading system according to the present invention isdesigned to take advantage of arbitrage opportunities that exist in amarket due to credit discrepancies between the parties. This type ofarbitrage is distinguishable from more traditional arbitrage in whichprice discrepancies are created by friction within the functioning of amarket, such as the logistics of completing and settling transactions.This type of arbitrage can be eliminated as markets become moreefficient. However, arbitrage opportunities based on creditdiscrepancies as addressed by the present invention will always existbecause not all trading entities are willing to extend the same amountof credit to all other trading entities.

Also, the intra-market type of arbitrage accommodated by the systemaccording to the present invention is distinguishable from inter-marketarbitrage, for example, “spread” trading in commodity futures markets.Systems that accommodate spread trading, whereby, for example, a partytrades one contract month for another contract month of the samecommodity (“calendar spreads”) or one commodity for another commodity,are known in the art. For example, the GLOBEX® trading system developedby Reuters Limited of London, England accommodates these types ofinter-market trades.

Various additional advantages and features of novelty which characterizethe invention are further pointed out in the claims that follow.However, for a better understanding of the invention and its advantages,reference should be made to the accompanying drawings and descriptivematter which illustrate and describe preferred embodiments of theinvention.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 provides a diagram of an electronic trading system according tothe present invention, including a computer and four trader terminals.

FIG. 2 provides a diagram of a credit matrix including credit parametersentered by each trading entity in the system according to the presentinvention.

FIG. 3 provides a diagram of a market “book” including all bids andoffers available in the market at a specific time.

FIG. 4 provides a diagram of trading entity S1's display screen whichdisplays only those bids and offers which are available to tradingentity S1 based on bilateral credit availability.

FIG. 5 provides a diagram of trading entity S2's display screen whichdisplays only those bids and offers which are available to tradingentity S2 based on bilateral credit availability.

FIG. 5A provides a diagram of trading entity S3's display screen, whichdisplays only those bids and offers which are available to tradingentity S3 based on bilateral credit availability.

FIG. 6A provides a diagram of trading entity S4's display screen, whichdisplays only those bids and offers which are available to tradingentity S4 based on bilateral credit availability.

FIG. 6B provides a diagram of a display screen on which multiple tradinginstruments are displayed.

FIG. 7 provides a functional block diagram of the operation of oneembodiment of the electronic trading system according to the presentinvention including an auto-arbitrage feature.

FIG. 8 provides a diagram of a trading entity auto-arbitrage parameterentry screen used in the system according to the present invention.

FIG. 9 provides a diagram of an alert message generated and displayed byone embodiment of the system according to the present invention.

FIG. 10 provides a functional block diagram of the operation of anotherembodiment of the electronic trading system according to the presentinvention including an auto-arbitrage feature.

FIGS. 11A and 11B provide functional block diagrams of the arbitragedetection operation of the system according to the present invention.

FIG. 12 provides a functional block diagram of another embodiment of theelectronic trading system according to the present invention including aname switch feature.

FIG. 13 provides a diagram of a name switch parameter entry screen usedin the system according to the present invention.

FIGS. 14A-14D provide an illustration of sample credit parameter andname switch parameter entry screens for trading entities S1-S4respectively.

FIGS. 15-18 provide diagrams of four sample transactions used toillustrate the operation of the name switch feature of the electronictrading system of the present invention.

DETAILED DESCRIPTION

With reference to FIG. 1, an electronic trading system according to thepresent invention includes a computer 101 and four trader terminals S1,S2, S3, and S4. The trader terminals S1, S2, S3, and S4 are connected tocomputer 101 through a two-way communications network 102 which enablesthe transfer of information between the computer 101 and the four traderterminals S1-S4. The electronic trading system according to the presentinvention is envisioned to include numerous trading terminals andpossibly intermediate nodes located between the trader terminals S1-S4an computer 101 in the communication network. Therefore, the electronictrading system according to the present invention is not limited to theconfiguration shown in FIG. 1.

For purposes of the present description, the terms “trading entity,”“trading party,” “party,” or “counterparty” refer to credit entities.For example, one trading entity or trading party (a credit entity) may,in fact, comprise a number of different branches, for example, a singlebank having numerous branches located in different cities and/orcountries. However, the credit limit entered into the system may be agroup credit limit (a total credit limit extended to a group offinancial institutions). A credit entity may also extend individualcredit limits to each branch of a financial institution and a globallimit which limits the total amount of credit that may be extended tothe financial institution, even though the individual limits are not allmet or exceeded. The credit matrix in the electronic trading systemaccording to the present invention may be modified to accommodate thenecessary credit structures. The communications network may be either ahardwired or wireless system.

A sample credit matrix for the four trading entities S1, S2, S3, and S4is shown in FIG. 2. Entries in the credit matrix are entered by eachtrading entity prior to the commencement of or during trading. Eachtrading entity enters only its respective credit limits for each othertrading entity, and credit limits entered into the other rows of thematrix by other trading entities are not accessible.

For example, with reference to FIG. 2, S1 has credit to trade with S3and S4 but not S2. S2 may also trade with S3 and S4, but is unwilling totrade with S1 (i.e., has not extended credit to S1). Trading entities S3and S4 may trade with all parties. The credit matrix used in the systemaccording to the present invention may store monetary amounts ofremaining credit (as shown in FIG. 2), ranking information such asalphabetic ranking indicating the extent to which one party wishes todeal with another party, yes/no values or any other type of appropriatefilter information.

FIG. 3 provides a diagram of the “book” of all bids and offers that areavailable within the system including the highest available bid and thelowest available offer. This book is stored by computer 101 andoptionally by the remote terminals S1-S4. As shown in FIG. 3, S1 hasentered a bid to buy 3 million at a price of 1.00. S3 has entered a bidto buy 7 million at a price of 0.90. S2 has entered an offer to sell 5million at a price of 1.00. S4 has entered an offer to sell 2 million ata price of 1.10.

FIGS. 4-6A provide schematic diagrams of the display screens of tradingentities S1, S2, S3, and S4 respectively in an embodiment of the presentinvention that includes a credit filtering feature which filters bidsand offers for bilateral credit availability between potentialcounterparties prior to displaying available bids and offers includingthe best available bid and offer. An asterisk (“*”) next to a displayedbid or offer indicates that the bid or offer is the trading entity's ownbid or offer and is therefore not available as a best bid or offer. In adifferent embodiment of the present invention (not shown), if a creditfiltering system is not used to screen the trading entity's displayscreens, each trading entity's (S1's and S2's) display will be the sameas S3's and S4's display shown in FIG. 6A.

FIG. 6B shows an example of a practical implementation of the displayscreen of FIG. 6A wherein a number of trading instruments aresimultaneously displayed.

With reference to FIG. 4, S1's display of bids and offers shows S3's bidand S4's offer because there is sufficient credit between S1 and S3 andS1 and S4 according to the credit matrix shown in FIG. 2. The displayaccording to one embodiment of the present invention also shows S1's ownbid. However, in alternate embodiment of the system according to thepresent invention, S1's own bid may be displayed in a separate window ofthe display screen or not displayed at all.

In the pictured embodiment of FIG. 4, in which the display ispre-filtered for bilateral credit availability, S1's display does notshow S2's offer because S1 and S2 have not extended one anothersufficient credit to trade according to the credit matrix of FIG. 2.S1's display would remain the same even if S1 was willing to extendcredit to S2 but S2 was not willing to extend credit to S1. In thecredit matrix of FIG. 2, however, neither S1 nor S2 has chosen to extendcredit to the other. Thus, the best bid and/or offer available to thetrading entities based on the stored credit matrix are respectivelydisplayed to the trading entities.

With reference to FIG. 5, S2's display includes S3's bid and S4's offerbecause there is sufficient credit between S2 and S3 and between S2 andS4 according to the credit matrix shown in FIG. 2. S2's display may alsodisplay S2's own offer. In alternate embodiments, S2's offer may bedisplayed in a separate window of the display screen or not displayed atall. S2's display does not show S1's bid because there is not sufficientcredit between S1 and S2 to permit a transaction between S1 and S2according to the credit matrix of FIG. 2. Again, the best available bidand/or offer are displayed.

With reference to FIGS. 5A and 6A, the display screens of tradingentities S3 and S4 show all bids and offers available in the marketbecause S3 and S4 have sufficient credit with all counterparties. Thesedisplay screens may also be seen by S1 and S2 if no pre-filteringfeature is available in the system, or if S1 and S2 may select anunfiltered display mode. As discussed above with reference to FIGS. 4and 5, S3 and S4 may see their own offers/bids, these offers/bids may bedisplayed in a separate window of the display screen, or theseoffers/bids may not be displayed at all. Again, the best bid and/oroffer are displayed.

The display screens shown in FIGS. 5A and 6A illustrate that S3 and S4,by virtue of having a better credit position that S1 or S2, have accessto transactions not available to S1 and S2 due to their worse creditposition. For example, S3 or S4 may buy 3 million from S2 at a price of1.00 and sell the 3 million to S1 for 1.00. These transactions are notavailable to S1 and S2. Instead, they may only be performed through S3or S4 (trading entities with sufficient credit from S1 and S2).Therefore, a transaction opportunity for S3 or S4 is created due tocredit discrepancies in the market.

In the transaction described above, wherein, for example, S3 buys fromS2 and sells to S1, there is no profit to be made by S3 because theoffer and bid prices are the same. While there is no financial incentivefor S3 to facilitate the trade between S1 and S2, S3's decision to do soprovides S3 with information as to the flow of trading instrumentswithin the market. S3 knows that S2 has sold 3 million and that S1 hasbought 3 million. Therefore, in some situations, e.g., when a tradingentity needs information as to who is buying and selling a certaininstrument, there may be a non-financial incentive for S3 to perform thetwo trades at the same price. However, in the more common situation,there is a clear financial incentive to S3 to perform the two trades ifS3 can buy from S2 at a relatively low price and sell to S1 at arelatively high price, thereby making an immediate profit.

The operation of the electronic trading system according to the presentinvention will now be described in detail with reference to FIGS. 7-10.

As illustrated in the functional block diagram of FIG. 7, a firstembodiment of the electronic trading system according to the presentinvention performs the following steps:

-   -   701: The trading entities on the system, e.g., trading entities        on trader terminals S1-S4 shown in FIG. 1, each enter credit        parameters for transactions with the other trading entities on        the system.    -   702: Next, the computer 101 stores the credit parameters (e.g.,        numerical limits, rankings, etc.) entered by the trading        entities as a credit matrix (for example, the credit matrix        shown in FIG. 2).    -   703: Trading entities enter bids and offers into the system        using their respective remote terminals.    -   704: The computer 101 collects bids and offers entered into the        system by the trading entities.    -   705: Once the computer 101 has collected the credit parameters,        bids, and offers from the trading entities, the computer then        distributes the bid and offer information as well as the credit        matrix to each trading entity's terminal or to an intermediate        node. With respect to the distribution function of the computer        101, the credit matrix may be distributed to the trader        terminals S1-S4 or intermediate node initially, prior to entry        of any bids or offers into the system, or distributed at the        same time as offer and bid information is distributed.    -   706: Then, the trader terminals or intermediate node uses the        credit matrix to filter the bids and offers, thereby determining        which bids and offers are available to the respective trading        entity based on bilateral credit availability. The available        offers and bids are displayed to the trading entities S1-S4 as        shown in FIGS. 4-6.    -   707: Prior to the commencement of or during trading activities        on the system according to the present invention, each trading        entity has the option of entering auto-arbitrage parameters        including minimum spread information, minimum size information,        and whether to automatically execute the arbitrage transactions        or first alert the user of the arbitrage opportunity. One screen        which may be used to enter auto-arbitrage options is illustrated        in FIG. 8 (see additional discussion below with reference to        FIG. 8).    -   708: Based on the trading entity's auto-arbitrage parameters, if        the trader terminal determines that an arbitrage opportunity is        available based on the trading entity's specified auto-arbitrage        parameters, the trader terminal either automatically sends an        “execute” command to computer 101 or automatically generates an        alert message for the trading entity, such as the alert message        shown in FIG. 9. If an alert is generated and the trading entity        decides to pursue the arbitrage transaction, the trader terminal        then sends an “execute” command to computer 101 in response to        the trading entity's input.    -   709: Once computer 101 has received the “execute” command from        the trader terminal, it automatically initiates a locking        procedure whereby it attempts to lock all of the trades        necessary to complete the arbitrage transaction. When the        transactions are locked, the system will not accept any inputs        that affect the status or terms of the locked offers and bids,        thereby preventing a situation in which some of the trades are        executed before others and then the later trades are no longer        available when the system tries to execute them. For example,        trading entity S3 could be stuck with 3 million instruments        (e.g., U.S. dollars) which S3 cannot sell for the same or a        better price because S1's bid has been taken by another trading        entity, altered by S1, or expired while the system is executing        the trade between S2 and S3. Thus, the locking feature is        essential to the electronic trading system according to the        present invention to insure that the middle trading entity        (e.g., trading entity S3 in the above example) does not expose        itself to any risk during the arbitrage transaction.    -   710: If computer 101 is able to lock all trades necessary to        complete the arbitrage transaction, the computer automatically        executes the trades.    -   711: However, if computer is not able to lock all necessary        trades, none of the trades are executed.    -   712: In either instance, the trading entity is notified that an        arbitrage transaction has or has not occurred and provided with        any information about the completed arbitrage transaction if        any. For example, trading entity S1 may be informed that its bid        has been accepted by trading entity S3. Similarly, trading        entity S2 may be notified only that its offer has been taken by        trading entity S3. Trading entity S3 will be notified of the        completion of its arbitrage transaction.

FIG. 8 provides an illustration of one possible configuration of anauto-arbitrage parameter entry screen. The screen includes a minimumspread entry for a plurality of instruments X, Y, and Z; a minimum sizedesignation for instruments X, Y, and Z; “automatic execute” and “alert”options for each instrument, and an “ok” button to indicate when thetrading entity has satisfactorily entered all auto-arbitrage parameters.The minimum spread determines the price differential needed before anauto-arbitrage opportunity will be recognized by the trader terminal (orthe computer 101 as discussed below with reference to FIG. 10). Forexample, if “0” is entered, the trader terminal will identify anarbitrage opportunity whenever the trading entity can buy and sell theminimum quantity for the same price. If “0.10” is entered, the traderterminal will identify an arbitrage opportunity whenever the tradingentity can sell for a price “0.10” or more higher than the price atwhich the trading entity can buy. The minimum size determines thequantity required before an arbitrage opportunity is identified.

The “automatic execute” and “alert” options enable the trading entity toselect whether the system will automatically execute an arbitragetransaction in response to a command to computer 101 from a remoteterminal when an arbitrage opportunity is identified, or insteadgenerate an alert message which is displayed to the trading entity (seeFIG. 9) whereby the trading entity is provided with discretion as towhether or not to proceed with the arbitrage transaction.

With reference to FIG. 10, the operation of a second embodiment of theelectronic trading system according to the present invention includesthe following steps:

-   -   1001: The trading entities enter credit and auto-arbitrage        parameters (as described above with reference to FIG. 7) into        their trader terminals. The trader terminals then transmit this        parameter information to computer 101.    -   1002: The computer 101 stores the credit and arbitrage parameter        information.    -   1003: The trading entities enter bids and offers into the system        which are uploaded to and stored by computer 101.    -   1004: The computer then distributes the offers and bids to the        trader terminals where the offers and bids are displayed. In        this embodiment, there is no pre-filtering function which        determines which bids and offers may be displayed to a trading        entity based on credit availability. However, this feature may        be added without changing the operation of this embodiment of        the electronic trading system according to the present        invention.    -   1005: Based on the stored credit and auto-arbitrage parameter        information, if computer 101 detects an arbitrage opportunity,        computer 101 automatically initiates the locking procedure        whereby all trades necessary to complete the arbitrage        transaction are locked to avoid any risk to the trading entity        taking advantage of the arbitrage opportunity.    -   1006: If the computer 101 is able to lock all necessary trades,        it executes the trades, thereby completing the arbitration        transaction.    -   1007: The computer 101 then notifies the trading entity as to        the results of the arbitration transaction.    -   1008: In the event that the computer 101 cannot lock all trades        necessary to complete the arbitrage transaction, the computer        will not execute any of the trades. Notification to the trading        entity in this case may be provided but is not necessary if the        trading entity's position has not been affected.

In the embodiment of the present invention shown in FIG. 10, thecomputer may also generate an alert message to the trading entity toenable the trading entity to decide whether to pursue the arbitrageoption. However, if the trader terminal itself generates the alertmessage, the trader terminal is provided with logic whereby which it maydetermine which trades are actually available to the trading entitybased on the trading entity's credit and auto-arbitrage parameters (asdiscussed above with reference to FIG. 7).

The electronic trading system according to the present invention iscapable of automatically identifying arbitrage opportunities thatinvolve a chain of multiple trades and multiple intermediaries, forexample, a process by which S4 sells to S2, S2 sells to S3, and S3 sellsto S1. In this sequence of trades, both S2 and S3 may profit, or one orboth parties may agree to facilitate the trades to gain access to marketflow information or for other non-financial purposes.

In the electronic trading system according to the present invention, itis crucial that the system be able to perform multiple tradessimultaneously to avoid creating any risk to the trading entityconducting the arbitrage transaction. The multiple transactions must betreated as contingent transactions, wherein one transaction cannot takeplace unless the others are also available. For example, a computerwhich stores all offers and bids available in the system is useful toensure that one transaction does not take place unless others also takeplace. As a result, it is difficult to incorporate the auto-arbitragefeature according to the present invention into a distributed tradingsystem which does not have a repository of trade information as does thesystem shown in FIG. 1 because the coordination of locking of multipletransactions in a distributed system (one without a computer) issignificantly more complex.

With reference to FIGS. 11A and 11B, the arbitrage opportunityidentification process will now be described in greater detail. Thisprocess, which may be automatically performed by computer 101 or traderterminals S1-S4, includes the following steps:

-   -   1101: Based on stored credit parameter information, the computer        101 or trader terminal (e.g., any of S1-S4) identifies the best        bid price available to a trading entity.    -   1102: Similarly, using the stored credit parameter information,        the computer 101 or trader terminal identifies the best offer        price available to that trading entity.    -   1103: Using the auto-arbitrage “minimum spread” parameter        entered by the trading entity (see FIG. 8), the computer 101 or        trader terminal compares the minimum spread value with the        spread between the identified offer and bid prices.    -   1104: If the spread between the best offer and bid prices is        greater than or equal to the minimum spread value entered by the        trading entity, the computer 101 or trader terminal then        compares the “minimum amount” value entered by the trading        entity with the total amount of all identified arbitrage        transactions. If only the best bid and offer have been        identified, the total amount is the lesser of the available        amounts of the best bid and offer. For example, if the bid is        for 3 million but the offer is only for 2 million, the computer        101 or trader terminal will compare the minimum amount value        with 2 million (the amount that can be bought and sold). If the        best bid and offer and the next-best bid and offer have been        identified (as described below in step 1107), the total amount        is determined by adding the available amount of each        transaction. The computer 101 will determine the optimum amount        available by automatically identifying the best possible        combination(s) of arbitrage transactions available to the        trading entity.    -   1105: If the total amount that can be traded is greater than or        equal to the minimum amount parameter, the computer 101        either (1) initiates the locking procedure described above with        reference to FIGS. 7 and 10 whereby both transactions are locked        to prevent risk to the trading entity or (2) generates an alert        message (see FIG. 9) which is transmitted to the trading entity.        If the trader terminal identifies the arbitrage opportunity, the        trader terminal either (1) automatically sends an “execute”        command to computer 101 or (2) generates an alert signal which        is displayed to the trading entity (see FIG. 9).    -   1106: If the spread available is less than the minimum spread        value entered by the trading entity, no arbitrage opportunity        exists.    -   1107: If the amount available is less than the minimum amount        value entered by the trading entity, the computer 101 identifies        the next best transaction available to the trading entity and        performs the minimum spread and minimum amount analysis again to        try to build up the total amount of the transaction to satisfy        the minimum amount parameter.

An alternative operation of the system according to the presentinvention is illustrated in FIG. 11B. The operation illustrated in FIG.11B is similar to that described in FIG. 11A, but includes severaladditional steps. As shown in FIG. 11B, when the minimum amountrequirement of step 1104 is satisfied, the computer 101 then comparesthe total amount of the arbitrage transaction with the maximum amountparameter entered by the trading entity (step 1110).

-   -   1111: If the total size is less than the maximum amount, the        computer 101 identifies the next-best transaction available to        the trading entity and evaluates this transaction to attempt to        build up the amount of the transaction to the maximum amount        parameter. If the trading entity has not entered a maximum        amount parameter, the computer 101 automatically continues to        add the next-best transactions until no further transactions are        available based on the other name switch parameters and then        executes the transactions.

1112: If the total amount that can be traded is greater than or equal tothe maximum amount parameter, the computer 101 either (1) initiates thelocking procedure described above with reference to FIGS. 7 and 10whereby all transactions up to the maximum amount are locked to preventrisk to the trading entity or (2) generates an alert message (see FIG.9) which is transmitted to the trading entity.

-   -   1113: If an “average spread OK” option is selected by the        trading entity (see FIG. 8), the computer 101 may continue to        identify bids and offers which can be traded but have a spread        less than the minimum spread set by the trading entity provided        that the weighted average of the identified bids and offers        having a minimum or greater spread and the identified bids and        offers having a below-minimum spread remains equal to or greater        than the minimum spread set by the trading entity.

Once the arbitrage transaction has been completed, acknowledgmentsignals may be generated by the computer 101 and sent to the appropriatetrader terminals. The generation of these acknowledgment signals may beaccomplished, for example, using the acknowledgment generation systemdescribed in U.S. patent application Ser. No. 08/364,009, filed Dec. 27,1994, and incorporated herein by reference.

With reference to FIG. 12, the operation of another embodiment of theelectronic trading system having a name switch feature according to thepresent invention includes the following steps:

-   -   1201: The trading entities enter credit and name switch        parameters into their trader terminals (e.g, any of S1-S4),        e.g., via a screen such as that shown in FIG. 13. The trader        terminals then transmit the parameters to the computer 101.    -   1202: The parameters are stored in computer 101 and optionally        stored in trader terminals, e.g., S1-S4.    -   1203: Bids and offers entered by trading entities on the system        are stored in computer 101.    -   1204: The computer 101 identifies a potential transaction.    -   1205: The computer checks the amount of available credit between        the parties to the transaction.    -   1206: If there is insufficient credit available between the        parties, the computer 101 searches for name switch possibilities        based on name switch parameters entered by the traders into the        system. For example, the computer may search for those parties        that indicate “yes” in the “name switch” column of the entry        screen shown in FIG. 13.    -   1207: If only one name switch option is identified by the        computer 101, the computer then checks other name switch        parameters entered by the trader, for example, minimum spread,        minimum size, maximum size and remaining credit parameters as        shown in FIG. 13. These criteria must be satisfied for both        parties to the transaction. For example, with reference to the        name switch parameters shown in FIG. 13, to determine whether        there is a sufficient minimum spread for a party to facilitate a        transaction between parties S2 and S4, the computer may either        select the larger of the two minimum spread values (i.e.,        “0.02”, the value entered for trader S4) or combine the two        spreads (i.e., “0.03”) and use the combined value to determine        whether a name switch can occur.

An example of the name switch option determination will now be provided.It is assumed that a transaction is desired between trading entities S2and S4. However, there is insufficient bilateral credit between S2 andS4 to enable execution of the transaction. Therefore, computer 101searches for a trading entity such as S3 which has entered a “yes” inits name switch category for both S2 and S4 (see FIG. 14C). The computer101 then compares the bid-offer spread of the transaction between S2 andS4 with the maximum of the minimum spread set by S3 for trading entitiesS2 and S4. As shown in FIG. 14C, S3 has entered a 0.01 minimum spreadfor S2 and a 0.02 minimum spread for S4. Therefore, the computer 101selects the maximum of these spreads, or 0.02. The computer 101 thendetermines the allowable amount of the trade based upon the minimum andmaximum values set by S3 for S2 and S4 respectively, such that theamount of the trade must be greater than the two minimums and subject toa cap equal to the lower of the two maximums. If all criteria aresatisfied, the computer 101 executes a name switch enabling thetransaction to be completed between S2 and S4 via S3.

-   -   1208: If multiple name switch options are identified by the        computer 101, the computer evaluates the other name switch        parameters of each name switching possibility (e.g., minimum        spread, minimum and maximum size, and credit remaining        parameters for each trading party) to identify a subset of        available name switch candidates as described above in step        1207.    -   1209: The computer then selects a name switching entity from        this subset using a selection process. For example, the        selection process may be random, sequential, equal allocation,        or any other appropriate selection process. Using a random        selection process, the computer 101 selects from among the        identified subset at random. Using a sequential selection        process, the computer 101 selects the next available name        switching party and rotates sequentially through the possible        name switching parties. In an equal allocation selection        process, the computer 101 determines the volume of name        switching transactions that each name switching party has        executed and attempts to equally allocate the name switching        transactions between the available parties.    -   1210-1212: Once a name switch party is selected, the name switch        is performed, the transaction is; automatically executed as        described above, and the parties are notified accordingly.    -   1220: If no parties are available based on the name switching        parameters, no transaction is executed.

A sample screen by which trading entities may enter credit and nameswitch parameters into the system is shown in FIG. 13. Using thisscreen, trading entities may enter credit limits for each potentialcounterparty, whether the trading entity is willing to name switch withthat counterparty, and other name switch parameters for eachcounterparty.

The operation of the name switch feature of the system according to thepresent invention will now be described in detail with reference toFIGS. 14-18.

For a name switch to occur, there must be sufficient bilateral creditavailable both between the less credit-worthy trading entity and themore credit-worthy trading entity and between the more credit-worthytrading entity and the party with whom the less credit-worthy tradingentity desires to trade. For example, with reference to FIGS. 14A-D,assume trading entity S1 enters the credit and name switch parametersshown in FIG. 14A. Similarly, trading entities S2, S3 and S4respectively enter credit and name switch parameters shown in FIGS.14B-D. Based on the parameters entered by trading entities S1-S4, thefollowing sample transactions are desired by trading entity S1:

FIG. 15: A match is tentatively possible between trading entity S1 andtrading entity S2 for an amount of $5M. In this example, trading entityS2 has no credit remaining with trading entity S1. Therefore tradingentity S1 cannot trade directly with trading, entity S2. However,trading entity S2 has extended sufficient credit to trading entity S3.Also, trading entity S3 has agreed to name switch for trading entity S1,and trading entity S3 has extended sufficient credit to trading entityS1 and trading entity S2 to cover the transaction. Finally, tradingentity S1 has extended sufficient credit to trading entity S3 to coverthe transaction. Since there is sufficient bilateral credit between S1and S3 and between S3 and S2, the name switch may take place (providingthat the minimum spread and other parameters are satisfied as describedabove with reference to FIG. 12).

FIG. 16: A match is possible between trading entity S1 and tradingentity S2 for an amount of $10M. Trading entity S1 cannot trade directlywith trading entity S2 because trading entity S2 has not extendedsufficient credit to trading entity S1. However, in this situation,trading entity S1 cannot name switch with trading entity S3 becausetrading entity S3 has not extended sufficient credit to trading entityS2 to cover the transaction.

FIG. 17: A match is possible between trading entity S1 and tradingentity S4 for an amount of $10M. Trading entity S1 cannot trade directlywith trading entity S4 because trading entity S4 has not extendedsufficient credit to trading entity S1. Also, trading entity S1 cannotname switch with trading entity S3 because trading entity S3 also doesnot have sufficient credit with trading entity S4.

FIG. 18: A match is possible between trading entity S1 and tradingentity S4 for an amount of $10M. Trading entity S1 cannot trade directlywith trading entity S4 as discussed above with reference to FIG. 17.Further, trading entity S1 cannot name switch with trading entity S2because trading entity S2 has not extended sufficient credit to tradingentity S1 to cover the trade.

While the electronic trading system according to the present inventionis capable of performing the name switch function based on adetermination of bilateral credit availability, the system may alsoperform the name switch function based on unilateral credit availabilityas is appropriate for certain types of transactions.

The automatic name switch feature of the electronic trading systemaccording to the present invention is also independent of any creditpre-filtering display function of the computer 101 or trader terminals(e.g., S1-S4).

The automatic name switch feature of the present invention may be basedon pre-existing commercial relationships between trading parties ratherthan on a direct profit basis as the result of a price spread like theauto-arbitrage feature, or on a combination of the two incentives. Oneexample of such a commercial relationship is an arrangement by which themore credit-worthy party charges the less credit-worthy party a fixedamount for each name switch transaction. The less credit-worthy partymay agree to pay this to increase its available options in the market.Therefore, the name switch feature of the electronic trading systemaccording to the present invention is based on user election (the userelects to credit lines switch), not system selection as is used forclearing houses in which credit risk is mutualized.

An optional feature of the system according to the present inventionincluding auto-arbitrage and name switch features is a trade ticketoutput feed located at the trader terminals S1-S4 and/or the computer101. One possible trade ticket output feed is described in U.S. Pat. No.5,003,473.

In summary, the auto-arbitrage and name switch features of theelectronic trading system according to the present invention employsimilar network principles but address different market concerns. Theauto-arbitrage feature enables trading entities to avail themselves oflow-risk trading opportunities. The automatic name switch featureenables trading entities to benefit from commercial relationships withother better-known or better-ranked (credit-wise) trading entities. Bothfeatures benefit the system by increasing liquidity without the additionof new bids and offers by performing trades that otherwise would not bepossible in the known systems due to credit limitations.

While the present invention has been particularly described withreference to the preferred embodiments, it should be readily apparent tothose of ordinary skill in the art that changes and modifications inform and details may be made without departing from the spirit and scopeof the invention. It is intended that the appended claims include suchchanges and modifications.

1-20. (canceled)
 21. A computer for use in an electronic trading system, the computer comprising: a network interface for communicating with a plurality of trading entities; a processor configured to perform actions comprising; receiving trading data and arbitrage parameter data for the plurality of trading entities including a first, second and third trading entity; automatically detecting contingent trades between the first trading entity and the second trading entity and between the first trading entity and the third trading entity according to the trading data and the arbitrage parameter data; locking trading data for the contingent trades prior to executing the contingent trades to ensure the contingent trades remain available during execution of the contingent trades; and if the contingent trades are locked, executing the contingent trades.
 22. The computer of claim 21, wherein the processor is further configured to create an arbitrage opportunity based on the contingent trades including determining that a direct trade between the second trading entity and the third trading entity would be unavailable.
 23. The computer of claim 22, wherein, for creating an arbitrage opportunity, the processor is configured to determine that a direct trade between the second trading entity and the third trading entity would be unavailable based, at least in part, on credit-related discrepancies.
 24. The computer of claim 22, wherein, for creating an arbitrage opportunity, the credit-related discrepancies include credit parameter data for the first, second and third trading entities.
 25. The computer of claim 24, wherein the credit parameter data includes a first credit limit for the first trading entity with respect to the second trading entity and a second credit limit for the first trading entity with respect to the third trading entity.
 26. The computer of claim 25, wherein the credit parameter data further includes a third credit limit for the second trading entity with respect to the third trading entity and a fourth credit limit for the second trading entity with respect to the first trading entity.
 27. The computer of claim 26, wherein the credit parameter data further includes a fifth credit limit for the third trading entity with respect to the first trading entity and a sixth credit limit for the third trading entity with respect to the second trading entity.
 28. The computer of claim 21 wherein the processor is further configured to perform actions comprising: receiving an indication from the first trading entity whether to pursue or not pursue the detected contingent trades; and executing the detected contingent trades in dependence upon the indication.
 29. The computer of claim 21, wherein, for receiving trading data and arbitrage parameter data, the arbitrage parameter data comprises at least one of a minimum spread parameter, an average spread parameter, a minimum size parameter and a maximum size parameter.
 30. The computer of claim 29, wherein the determination of contingent trades is based on, at least in part, on the minimum spread parameter, the average spread parameter, the minimum size parameter and the maximum size parameter.
 31. The computer of claim 21, wherein the processor is further configured to automatically execute the detected contingent trades.
 32. A method comprising: receiving, at a computer, trading data and arbitrage parameter data for a plurality of trading entities including a first, second and third trading entity; automatically detecting, via the computer, contingent trades between the first trading entity and the second trading entity and between the first trading entity and the third trading entity according to the trading data and the arbitrage parameter data; locking trading data for the contingent trades, via the computer, prior to executing the contingent trades to ensure the contingent trades remain available during execution of the contingent trades; and if the computer determines the contingent trades are locked, executing the contingent trades via the computer.
 33. The method of claim 32, further comprising creating an arbitrage opportunity based on the contingent trades including the computer determining that a direct trade between the second trading entity and the third trading entity would be unavailable.
 34. The method of claim 33, wherein, for creating an arbitrage opportunity via the computer, the computer determines that a direct trade between the second trading entity and the third trading entity would be unavailable based, at least in part, on credit parameter data for the first, second and third trading entities.
 35. The method according to claim 34, wherein the credit parameter data includes a first credit limit for the trading entity with respect to the second trading entity and a second credit limit for the first trading entity with respect to the third trading entity.
 36. The method according to claim 35, wherein the credit parameter data further includes a third credit limit for the second trading entity with respect to the third trading entity and a fourth credit limit for the second trading entity with respect to the first trading entity.
 37. The method according to claim 36, wherein the credit parameter data further includes a fifth credit limit for the third trading entity with respect to the first trading entity and a sixth credit limit for the third trading entity with respect to the second trading entity.
 38. The method according to claim 32, further comprising: receiving, at the computer, an indication from the first trading entity whether to pursue or not pursue the detected contingent trades; and executing the detected contingent trades in dependence upon the indication.
 39. The method according to claim 32, wherein, for receiving, at the computer, trading data and arbitrage parameter data, the arbitrage parameter data comprises at least one of a minimum spread parameter, an average spread parameter, a minimum size parameter and a maximum size parameter.
 40. The method according to claim 39, wherein the determination of contingent trades is based on, at least in part, on the minimum spread parameter, the average spread parameter, the minimum size parameter and the maximum size parameter. 